Wednesday, February 15, 2012

Tanner: Social Security Accounts “Still a Better Deal.”

Over at the Cato Institute, Mike Tanner writes that

“If workers who retired in 2011 had been allowed to invest the employee half of the Social Security payroll tax over their working lifetime, they would retire with more income than if they relied on Social Security. Indeed, even in the worst-case scenario—a low-wage worker who invested entirely in bonds—the benefits from private investment would equal those from traditional Social Security.”

I’ve made similar calculations and they’re right. That said, these kinds of analyses need to better account for:

a) Market risk: we really don’t know a lot about long-term market returns because we have so few non-overlapping periods of data from which to sample. If we’ve got good data since, say, around 1870, that means  that for 30-year holding periods we have a sample of four. Not much to go on. If we look at the risk of single-year returns and then extrapolate over longer periods, we’ve got a much bigger sample – and the potential downside risk looks a lot worse; and

b) Transition costs: Grandma’s benefits aren’t going to pay themselves, and they’re going to get paid at all if I take my payroll taxes out of the system. So we need to put in extra money during that transition period as accounts are built up. Mike is right that financing the transition with spending cuts is better than with tax increases. But does it really make a difference? If we cut spending and I get to keep the proceeds, I’m better off (assuming that the spending is wasteful). But if we cut spending and it’s used to finance the transition, I’m not better off. In any case, it’s really the spending cuts, not the accounts, that are doing the leg-work here. 


WilliamLarsen said...

As an engineer there is a theory that “Energy can neither be created nor destroyed, only changes in state.” When it comes to social security, many like Tanner think that money can be created out of thin air; “b) Transition costs: Grandma’s benefits aren’t going to pay themselves, and they’re going to get paid at all if I take my payroll taxes out of the system. So we need to put in extra money during that transition period as accounts are built up. “

Let us look at just the present value unfunded liability of SS-OASI. According to my computer model, it is over $24 Trillion based on a 5% return. The US Treasury rate is not 5%, but less so the unfunded liability increases substantially, as much as $20 Trillion.

Those who were born prior to 1938 took more out of SS-OASI than their payroll contributions could support. This is supported by Commissioner Ball’s premise;

Robert Ball
Commissioner of Social Security
1962 and 1973, Wrote June 2005
“When Social Security began, benefits for those nearing retirement age were much higher than could have been paid for by the contributions of those workers and their employers. This was done so that the program could begin paying meaningful benefits even though workers nearing retirement would have only a short time to contribute.”

“Instead, the impression is left that the program was sound only when 16 paid in for every one taking out. Thus, of course, when the ratio changed to 3.3 to 1, the program became “unsustainable.”

“They ignore the fact that in 1950 only about 15 percent of the elderly were eligible for benefits and that it was expected by all who were acquainted with the program that the ratio would, of course, change dramatically as a greater proportion of the elderly became beneficiaries.”

“What in fact happened is that when just about all the elderly first became eligible for Social Security benefits, about 1975, the ratio was 3.3 contributors to each beneficiary and the ratio has stayed that way for the past 30 years. As the baby boom reaches retirement age, as the administration says, the ratio is expected to drop for the long run to 2.0 or 1.9 workers to each retiree.”

So in order to pay more to one group than another, the other group must either receive less or pay more. I question why grandma is entitled to any benefits at all!

When a person says “We Earned it!” what exactly do they mean?

To me, this phrase is a righteous euphemism for making the more truthful statement: "We were snookered by this Social Security Ponzi scheme, and now we are going to snooker the next generation!"

If Social Security benefits have been "earned" who is obligated to pay benefits to those who "earned" them? Workers? On a regressive tax basis? Why? Why perpetuate a fraud upon the innocent? Who is responsible for bearing the burden of a fraud? The person defrauded? Or an innocent or unborn child?

Each passing year this ponzi schemes unfunded liability is growing now by well over $1 Trillion a year. Can anyone truly believe we are going to be able to set aside money for our own retirement while paying for grandma’s as well? Tanner needs to face the reality that Social Security cannot and should not be saved, but that the Social Security Act should be repealed in its entirety for the good of our country and economy.

Bruce Webb said...

Long time no see.

I'd feel better about Tanner's ROI analysis if he (and you) made explicit the calculations that would adjust for the. Insurance components (disability and survivors) and the inflation protected annuitization provided by Social Security.

That is the one time Cato Project for Social Security Privatization (which IIRC employed both of you back in the day) may have had perfectly good calculations for lifetime returns for single male professionals who earned close to the income cap most of their work lives and hit the mid-point of the mortality tables. But who knows, because the numbers never seem to get expressed precisely that way. But more important to those of us with a social democratic bent is how this all works out when distributed across the triple axis of mode, median, and mean.

That is for all the talk about Ownership Society and Inheritability actual theoretical plans including Posen, Bush Model 2 and LMS and real world examples Pinero/Chile and Galveston had projections or outcomes that worked ever so much better for people earning at or over the cap. While lower income workers ended up stuck with at best joint survivor annuities or external subsidies.

Which is why among progressive supporters of Social Security I am just about the Lone Ranger on the payroll cap. I don't want the fundamental principle changed (although I would accept a LMS style restoration of 90% vs 84% covered income incidence). There is a reason we don't access top wage incomes and exempt "unearned" income from FICA. Because those people can self-insure their retirement and God Bless. But by that same token SOMEBODY gets screwed and under the current formula it is professionals earning exactly $110,099 a year. And maybe those earners down to the 70% income level. Because that second bend point starts biting ROI.

But the test Tanner and perhaps you need to meet is results for the 30-70% income cohort . And frankly I am not seeing it. Instead we see LMS style guarantees for the lowest income workers and ROI calcs for the 70-84% folks but not much for the broad middle

WilliamLarsen said...

Social Security is composed of OASI and DI. Combining the returns of both ignores the fact they are separate and need to be measured on their own merits.

Attempting to combine different tax rates and eligibility requirements only muddies the analysis. When analyzing any problem, it is best to break it down into individual components.

SS-OASI is a terrible return for those born after 1938 (single) 1948 (married).

JoeTheEconomist said...

The problem that I have with this type of analysis is the lack of honesty. We are comparing apples and oranges here. We are comparing Social Security which has enormous legacy costs with a system that has no legacy cost component. It is like comparing horses which run on different tracks.

You can't 'pay' for transition costs as long as you have debt. We are simply diverting the tax base from something that has a lower priority. We are ignoring the opportunity cost of these funds which is to pay down the debt. We then compare the two results as those there is no opportunity cost.